by Calculated Risk on 12/17/2007 12:30:00 PM

From the WSJ: National City Warns of Loan Losses

National City Corp. expects to set aside about $700 million to cover loan losses in the fourth quarter and said it incurred mortgage-related charges of about $200 million in October and November.

"The mortgage business continues to be under stress," the financial-services company said in a Securities and Exchange Commission filing....

Here is the National City SEC filing.

Click on graph for larger image.

This graph shows the key nonperforming assets of National City Corp. Residential REO's are including in National City mortgage and First Franklin nonperforming assets.

According to the SEC filing:

Credit quality in the commercial and core consumer portfolios, including direct home equity lending, remains satisfactory. The areas of elevated risk continue to be in the run-off portfolios of First Franklin non-prime mortgages, especially seconds; broker-originated home equity loans and lines of credit associated with the former National Home Equity business; and certain sectors of investment real estate and residential construction. In particular, indirect home equity loans and lines that were transferred to portfolio in the third quarter have shown further deterioration beyond that which was anticipated at the time the September 30 loan loss allowance was established.
emphasis added

Look at the graph. Most of the problems are in residential, but the nonperforming CRE (green) and nonperforming CRE construction (red) are definitely climbing.

by Calculated Risk on 12/17/2007 10:05:00 AM

From Bloomberg: Moody's Warnings on FGIC, MBIA Cast Doubt on $1.2 Trillion Debt

Moody's Investors Service's warning that the top credit ratings of FGIC Corp. and three other bond insurers may be cut casts doubt on $1.2 trillion of municipal, corporate and asset-backed securities.
...
``Everyone understands the systemic risk if even one of these companies is downgraded,'' said Peter Plaut, an analyst at hedge fund manager Sanno Point Capital Management in New York.

Does everyone understand the systemic risk? I'm not so sure. This warning puts 89,709 public finance issues on negative watch and probably impacts most communities in the U.S..

by Calculated Risk on 12/17/2007 09:38:00 AM

From Bloomberg: Centro Slumps 76% on Struggles to Refinance Debt (hat tip CG and Brian)

Centro Properties Group, the owner of 700 U.S. shopping malls ... say[s] it's struggling to refinance debt ...

Melbourne-based Centro suspended dividends and said in a statement that it may have to sell assets, after lenders set a Feb. 15 deadline to negotiate maturing debt. Traditional sources of funding are ``shut for business,'' Chairman Brian Healey said in the statement.
...
``We never expected nor could reasonably anticipate that the sources of funding that have historically been available to us and many other companies would shut for business,'' Centro's Healey said in the statement.

No one could have known.

UPDATE: Last week I mentioned MBS (apartments) in Texas was delinquent on many loans. The WSJ had a story on Saturday: In Texas, MBS apartment Titan Battles Defaults

Massive Texas apartment-complex owner and operator MBS Cos. is in danger of defaulting on nearly $400 million in loans and has sought bankruptcy-law protection for many of its properties to stave off foreclosure.

by Calculated Risk on 12/16/2007 09:45:00 PM

Here are a couple of different stories about CDOs and lawsuits. The first story concerns Wall Street selling CDOs to municipalities who now are claiming they were unaware of the risks.

From the Finanical Times: Lehman faces legal threat over CDO deals (hat tip Viv)

Lehman Brothers faces the threat of legal action by municipal councils in Australia over the sale of high-risk collateralised debt obligations by the Wall Street bank's local subsidiary, Grange Securities.

At least two councils in New South Wales and a third in Western Australia are considering litigation against Grange ...

The Lehman-originated Federation CDO, exposed to the US subprime mortgage market, was last month marked down to just 16 cents in the dollar by the bank, leaving councils nursing paper losses of 84 per cent.

The sale by Grange and others of many hundreds of millions of dollars worth of CDOs to Australian councils, some of which had 70 per cent or more of their total investment devoted entirely to CDOs, has sparked an investigation by the state government of New South Wales.

The second story concerns sophisticated investors wrestling over the scraps, from the WSJ: CDO Battles: Royal Pain Over Who Gets What

A recent filing in New York state court provides a window into the legal battles likely to ensue from battered investments. Big players, including Deutsche Bank AG, bond insurer MBIA Inc., Wachovia Corp. and UBS AG are tangled together over a mortgage investment vehicle named Sagittarius.
...
On Nov. 6, Sagittarius triggered "an event of default." This prompted MBIA to claim it should get all the remaining payments. That put it into potential conflict with Deutsche, the CDO's trustee, and UBS, an investor with fewer rights in the event of default.

Sorting out how to value the assets, who gets paid and whether to pull the plug on struggling CDOs is complicated business. Often little is known about who holds what. "If there's one safe prediction for 2008, it is that legal teams will be busy," wrote J.P. Morgan Chase in a recent report led by analyst Chris Flanagan.

The lawyers will definitely be busy.

by Calculated Risk on 12/16/2007 12:02:00 PM

It is always difficult to tell - in real time - if the economy has slipped into a recession. Dr. Jim Hamilton at Econbrowser (and extended by Chauvet - see below) has developed a model that seems to do a pretty good job. From Chauvet:

"According to the model, the probability that the American economy was in a recession in October, the last month for which we have data, was only 16.5 percent. This is high enough to make us nervous about the future, but it is low enough that we can be fairly sure that if a recession is going to be visible in the data, it did not begin until November at the earliest."

The next few months will be an interesting test of the Hamilton / Chauvet models.

Here are six views on the recession question from the NY Times:

You Can Almost Hear It Pop, by Stephen S. Roach

The Facts Say No, by Marcelle Chauvet and Kevin Hassett

Bet the House on It, by Laura Tyson

Not if Exports Save Us, by Jason Furman

Nobody Knows, by James Grant

Wait Till Next Year, by Martin Feldstein

"My judgment is that when we look back at December with the data released in 2008 we will conclude that the economy is not in recession now.

There is no doubt, however, that the economy is slowing. There is a substantial risk of a recession in 2008."

Feldstein's view is especially important since he is the current President of the National Bureau of Economic Research (NBER) the organization that calls recession in the U.S..

And for fun, here are some Greenspan quotes from the '90/'91 recession: (bear in mind that the recession started in July, 1990):

“In the very near term there’s little evidence that I can see to suggest the economy is tilting over [into recession].” Greenspan, July 1990

“...those who argue that we are already in a recession I think are reasonably certain to be wrong.” Greenspan, August 1990

“... the economy has not yet slipped into recession.” Greenspan, October 1990

Source (pdf): "Booms, Busts, and the Role of the Federal Reserve" by Dr. David Altig.